Chapter 07

Which of the following statements is true?

a. Another name for capital consumption allowance is depreciation.
b. When there are two consecutive quarterly declines in Real GDP the economy is said to be
in recession (based on the standard definition).
c. The expansion of a business cycle refers to increases in Real GDP beyond the recovery.
d. a and b
e. a, b, and c
If GDP in year 1 is the same dollar amount as the GDP in year 2, does it follow that Real GDP in
year 1 is the same as Real GDP in year 2?
a. Yes, since prices must necessarily be the same in the two years.
b. No, since equal GDP figures do not account for population.
c. No, since prices may not be the same in the two years.
d. Yes, since equal GDP figures do account for a change in the quality of goods produced in
the two years.
e. none of the above
Which of the following statements is true?
a. National income accountants consider the portion of corporate profits that is used to pay
corporate profits taxes to be income earned by households but not received.
b. Net domestic product (NDP) is a smaller dollar amount than GDP.
c. Personal income includes transfer payments.
d. b and c
e. a, b, and c
Consumption expenditures in the U.S. usually account for approximately __________ percent of
GDP.
a. 40
b. 50
c. 60
d. 70
e. 80
Refer to Exhibit 7-1. Which of the following summations represents GDP using the expenditure
approach?
a. $4,150 + $751 + $850 + $300
b. $4,150 + $751 + $850 - $331 + $300
c. $4,150 + $751 + $850 + $331 + $300
d. $4,150 + $751 + $850 + $331 + $300 - $320
e. $4,150 + $751 + $850 + $331 + $300 - $320 + $111
Refer to Exhibit 7-1. Which of the following summations represents net domestic product?
a. GDP - $222
b. GDP - $331

c. GDP - $412
d. GDP - $295
e. GDP + $134
Net interest is the interest paid out by US households and government minus the interest income
they received.
a. TRUE
b. FALSE
Corporate profits is the largest category of national income.
Question 8 options:
a. TRUE
b. FALSE
The best reason economists take only final goods and services into account when calculating
GDP is that
a. this is the way things have always been done.
b. they want to avoid the problem of final counting.
c. they want to avoid the problem of double counting.
d. this is the only way things can be done.
Look at the following data: GDP = $11,920 billion; investment = $2,100 billion; exports = $500
billion; government purchases = $1,450 billion; consumption = $8,500 billion. What does import
spending equal?
a. $630 billion
b. $370 billion
c. $1,320 billion
d. $430 billion
e. $474 billion
National income equals
a. wages + salaries + corporate profits + net income.
b. compensation of employees + proprietors' income + corporate profits + rental income +
net interest.
c. compensation of employees + proprietors' income + indirect business taxes + rental
income + net interest.
d. the monetary value of fringe benefits + tips + wages + profits + salaries.
e. none of the above
The sale of __________ goods is omitted from current GDP because __________.
a. intermediate goods; these goods do not constitute production
b. used goods; these goods were counted in an earlier year
c. illegal; these goods do not constitute economic value
d. b and c
e. a, b, and c

Which of the following statements is false?

a. Domestic income is the total income earned by the people and businesses within a
country's borders.
b. National income is the total income earned by U.S. citizens and businesses, no matter
where they reside or are located.
c. Corporate profits is the largest component of national income.
d. National income = compensation of employees + proprietors' income + corporate profits
+ rental income + net interest.
Refer to Exhibit 7-5. During year 3, Country Z experienced economic _____________ and
_________________.
a. decline; deflation (falling price level)
b. growth; inflation (rising price level)
c. growth; deflation (falling price level)
d. decline; inflation (rising price level)
Refer to Exhibit 7-1. What is the value of gross domestic product?
a. 6062
b. 5731
c. 3072
d. 6382
e. 2637
Which of the following statements is true?
a. Indirect business taxes are a component of national income because when added to the
other components of national income, the sum must equal GDP.
b. Indirect business taxes must be subtracted from national income to yield a figure equal to
GDP.
c. Indirect business taxes are a part of national income because they are considered a
payment to a factor of production.
d. Indirect business taxes are not part of national income because they are not considered a
payment to a factor of production.
Suppose you have data on durable goods, nondurable goods, fixed investment, government
purchases, exports, and imports. Can you compute GDP?
a. No, since data on services and prices are missing.
b. No, since data on inventory investment are missing.
c. No, since data on inventory investment and services are missing.
d. No, since data on services are missing.
e. Yes.
Country A has a higher GDP than country B. What does this mean?
a. It means that on a per-capita basis the residents of country A are relatively better off (in
terms of the goods and services they have available to them) than the residents of country
B.

b. It means that on a per-capita basis the residents of country A are richer than the residents
of country B.
c. It means that more goods and services were produced in country A than country B.
d. It means that the total market value of the final goods and services produced in country A
is greater than the total market value of the final goods and services produced in country
B.
e. a and d
If a business firm in Country A produces a good but does not sell it in that same year, that good
will not be counted in Country As GDP.
a. TRUE
b. FALSE
Look at the following data: consumption = $915 billion; exports = $40 billion; imports = $33
billion; inventory investment = $123 billion; fixed investment = $500 billion; government
purchases = $300 billion. GDP is equal to
a. $1,632 billion.b
b. $1,466 billion.
c. $1,911 billion.
d. $1,845 billion.
e. none of the above
Suppose that fixed investment is $550 billion and (total) investment is $630 billion. What does
inventory investment equal?
a. $80 billion
b. $550 billion
c. $630 billion
d. $1,180 billion
e. There is not enough information to answer this question.
For economists trying to determine peoples preferences, observing how people act is more
important than what people say in surveys.
a. TRUE
b. FALSE
Refer to Exhibit 7-5. What was Country Zs economic growth rate between year 2 and year 3?
a. -0.03
b. 0.026
c. 0.14
d. -0.022
Refer to Exhibit 7-3. Consumption is equal to
a. 3700
b. 9000
c. 10150
d. 8200

e. 9700
Refer to Exhibit 7-1. What is the value of net domestic product?
a. 5840
b. 5731
c. 5650
d. 5767
e. 6637
An example of income earned but not received is
a. welfare payments.
b. Social Security payments.
c. undistributed profits.
d. a and b
e. a, b, and c
The two ways of measuring Gross Domestic Product are the __________ approach and the
__________ approach.
a. expenditure; income
b. expenditure; national product
c. national product; income
d. real gross domestic product; nominal gross domestic product
e. net national product; personal income
Capital consumption allowance refers to
a. capital goods being used up in production through natural wear, obsolescence, and
accidental destruction.
b. people sending money between countries.
c. the purchase of used factories.
d. the purchase of goods that allow households to consume more services.
In 1820, the country with the highest per capita GDP was
a. Australia.
b. the United States.
c. Austria.
d. Germany.
e. the Netherlands.
Which of the following would definitely not be included in the measurement of GDP?
a. value of the services of a painter who paints your garage
b. value of the services of a person who mows his or her own lawn
c. value of the services of a maid who cleans your house
d. value of the services of a plumber who fixes your kitchen sink